Credit-score break? Don’t hold breath

WASHINGTON — You may have noticed the big media splash recently when Fair Isaac, developer of the iconic FICO credit score, announced the debut of a new score version that no longer would penalize consumers who have medical debt-collection issues in their credit files.

The announcement hit the front pages of publications such as The Wall Street Journal and was highlighted on national TV network news. Steve Brown, president of the National Association of Realtors, was so enthusiastic about the new score’s potential that he predicted it would “make a real difference in the lives of millions of Americans who have been shut out of the housing market or forced to pay higher mortgage interest rates because of flawed credit scores.”

Wow. Break out the Champagne, right? Maybe not so fast. What nobody mentioned about the score, dubbed FICO Score 9, is that most homebuyers aren’t likely to see any direct benefit from it anytime soon, very possibly not for years.

That’s because the two dominant financing sources in the mortgage market — Fannie Mae and Freddie Mac — are not planning to use the new score in evaluating loan applicants for the foreseeable future.

And major banks and mortgage companies aren’t jumping to adopt it either.

None of this detracts from the merit or potential value to consumers of FICO’s new score. The company says that by separating out medical debt-collection issues — which are commonplace negatives in millions of consumers’ credit files — from other types of collection actions, the FICO 9 model will more fairly rank the actual risks posed by some applicants compared with others. For borrowers whose sole major negative credit file account is an unresolved medical debt, Fair Isaac estimates the new model will increase scores by a median 25 points.

FICO 9 also is designed to more fairly treat applicants who have limited accounts on file with the credit bureaus — often young, first-time homebuyers or consumers who have made minimal use of credit cards and other forms of personal credit. So on the surface, the advent of the new score is a big deal. But here’s the real world: New FICO score models matter in the mortgage market only if lenders choose to use them to evaluate applicants. And, based on my discussions with leaders in the mortgage field, FICO 9 is a long way off from adoption. It’s not likely to help many buyers anytime soon, despite the hype. Start with Fannie and Freddie, the giant mortgage investors. Both use, and have confidence in, FICO scores from model changes dating to between 2004 and 2008. Both tell me they are still in the process of evaluating whether to even use FICO 8, now 6 years old and the last big, consumer-friendly model change.

Neither company can provide timelines on when even that set of earlier scoring advances will become part of their underwriting systems, much less FICO 9.

Major mortgage lenders feel the same way. Asked whether and when it planned to use the new FICO score, JPMorgan Chase declined to comment. Wells Fargo also declined to predict when it might take a look at FICO 9, but said “our view is that credit decisions are more complex than a credit score alone.”

Some bankers note that they already ignore or discount negative medical-debt items on applicants’ credit reports and say a scoring change won’t have much of an impact on approvals and rejections.

Pete Mills, senior vice president of the Mortgage Bankers Association, said home-loan industry adoption of the new score “will hinge on whether (Fannie and Freddie)” include them in their underwriting guidelines that are provided to lenders. Until then, Mills said, “we expect industry adoption to be limited.”

So why the general lack of urgency within the mortgage industry about using FICO’s ballyhooed new model? Among other reasons, it can cost substantial sums of money to retool complex automated underwriting systems, especially at Fannie and Freddie. Lenders have to weigh the costs and benefits.

As one industry leader put it: “Will the relatively small improvements be worth the expense” and hassles? And with all the other regulatory changes mandated by recent financial reform legislation, do we have the time and manpower to devote to analyzing the effects of FICO 9? The sobering answers for homebuyers appear to be no.